Why Warren Buffett Is Spot-On With His Vanguard Fund Advice

Vanguard indices are a winning strategy for retail investors

Warren Buffett is arguably the most famous investor of our time — likely all-time. Some others, like Carl Icahn, Jim Chanos and George Soros are well-known and for good reason. But none come up quite as often as the Oracle of Omaha. Humble about himself and with his wallet, Buffett has pretty sound (and simple) advice for retail investors, specifically when it comes to Vanguard funds.

Vanguard index funds are low-cost alternatives for investors who do no want to spend time researching individual stocks. Furthermore, they can also serve as the cornerstone for an investor’s portfolio, alongside a hand-selected crop of individual stocks.

Why would someone do this?

In the first case, Vanguard offers simple and cheap options to gain exposure to the stock market. For instance, if investors used the Vanguard Total Stock Market ETF (NYSEARCA:VTI), they’ve seen returns of more than 23% over the past 12 months. So rather than spend time scanning balance sheets, listening to conference calls and researching end markets, investors can plunk down their cash in a simple-to-use fund that gets them great returns at a low cost.

On the flip side, they also missed out on the portfolio-changing moves of stocks like Boeing Co (NYSE:BA), Nvidia Corporation (NASDAQ:NVDA) or virtually any of the FAANG stocks — Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).

In the second case for buying index funds, investors can also use Vanguard funds as a core holding in their portfolio. For instance, say they purchased the Vanguard 500 Index Fund (NYSEARCA:VOO), which has returned about 24% over the last 12 months. Not only were investors able to quickly and cheaply add stock exposure, they were also able to see a 24% one-year return as well.

The benefit of this is that it allows investors to responsibly diversify a portion of their investment in an index fund, while also adding a handful of stocks with a smaller capital allocation. Whether they’re high-growth momentum stocks or dividend-paying titans, these companies should be well researched by the investor. Still, in theory this would allow an investor to buy a fund like the VOO or VTI, while also adding stocks like Boeing, Nvidia or FANG holdings.

Buffett’s Bet on Vanguard

Most investors don’t do enough (or proper) research when it comes to stock investing. They don’t bother to access SEC.gov, read a 10K or listen to a conference call. Many can’t read charts and just follow others blindly. Aside from that, many trade too often as well, allowing commissions and fees to add up, cutting into their performance. Simply put, many investors don’t possess the skill to beat the S&P 500 year in and year out.

Still don’t see why Buffett believes in the simplicity of buy-and-hold with a simple fund like Vanguard? Well, the man puts his money where his mouth is.

In 2006, Buffett proposed a bet that over the course of a decade, a simple low-cost S&P 500 index fund would outperform a collection of at least five hedge funds. These funds typically charge rather high fees. For the sake of this bet, Buffett proposed a $500,000 charitable wager.

Despite his assumption that several fund managers would be up to the task, just one came forward: Ted Seides. Ten years later, Buffett won by a landslide. In fact, with just a few months left to go, Seides threw in the towel, with his fund picks returning just 22% vs. Buffett’s return of more than 80%.

No, I don’t exclusively follow the Oracle of Omaha, and I don’t have a position in Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), but I do like a blend of index/ETF investing mixed with picking individual stocks and businesses.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.